Emerging Jr. Gold Producers Ranked -- Market Cap to Reserves Method

ERRATA: The MI&I assumption for Gold Resource in the original post was incorrect. They have zero MI&I. However, they do have an internal gold equivalent (GE) resource estimate of 773,000 ounces. This post has been adjusted to reflect the GE resource for Gold Resource. Thanks Doug for the comment on this mistake. 8:36pm Monday, May 27, 2008.

Another one of the techniques I use to value emerging junior gold miners is to identify their relative value based on measured, indicated, and inferred (MI&I) reserves and market capitalization (MC). Dividing MC by MI&I provides a dollar amount per ounce of reserves metric useful for comparison of companies.

This is just a first step and can be misleading about the valuation of companies who end up with considerably more potential gold reserves than currently reflected in Canada's National Instrument 43-101.

43-101 is a rule developed by the Canadian Securities Administrators that govern the definition of resources and reserves. This definition is generally less strict than the SEC's proven and probable reserves and, in my opinion, a better reflection of company gold reserves.

That said, Jaguar Mining only has 1.3 million ounces of gold MI&I, yet management believe their properties may have up to 10 million ounces. Companies like San Gold, Jinshan, Gold-Ore, Metanor, and others also can be reasonably expected to have larger reserves of gold than reported. As these companies continue to prove up gold reserves and the share price remains stable, they would become even more undervalued.

Another limitation of the MI&I is it does not include the value of polymetallic reserves sometimes found with gold deposits, including silver, zinc, copper and other metals. These non-gold reserves can be used to offset the production cost of mining and milling gold.

This quantitative valuation technique complements my earlier cash flow multiple valuation and is only part of my overall assessment of these companies. Qualitative factors like political risk, currency exchange risk, property rights risk, remote site risk, single mine risk, operational risk, and management competence risk are also important considerations in evaluation emerging junior gold mining producers.

The following is my analysis of 15 emerging gold producers using a market capitalization divided by measured, indicated, and inferred gold reserves based on closing share prices on May 23, 2008. The lower the dollar value, the more undervalued the stock is relative to the others. As a metric for valuing these companies using the MC/MI&I, it is interesting that a recent acquisition of a junior valued the gold reserves at about $280 per ounce. Other recent buyouts have valued gold reserves at about $200 per ounce. My sense is that any company with MC/MI&I below $100 per ounce could be considered a "deep value" emerging junior gold producer, especially if they are quickly ramping up gold production.

COMPANY...........MC/MI&I
Kinbauri Gold......$25
Gold-Ore Res.......$29
ATW Ventures.......$55
Metanor Res........$84
W. GoldFields......$93
Jinshan Gold.......$99
MDN Inc............$105
Apollo Gold........$126
Minefinders........$135
Capital Gold.......$142
San Gold Res.......$151
Aurizon Mines......$208
Gold Resource......$276*
Jaguar Mining......$290
Alamos Gold........$468

* internal gold equivalent resource estimate

This is another way to think about investments in undervalued emerging gold producer stocks. I hope this is useful for readers.

Best,

Gold Stock Strategist
========================
Full disclosure: I own shares in several of the companies listed above. The information provided in this post is believed to be correct, but not guaranteed. Investing in junior gold miners entails risks. Readers are responsible for their investment decisions. Do your own due diligence.